Powers of Appointment in New York Estate Plans: Flexibility That Can Change Who Inherits
A trust may appear to state who ultimately receives its property, yet the final distribution can sometimes depend on a decision made years later by someone other than the person who created the trust. That authority is called a power of appointment.
A power of appointment can be useful when an estate plan is expected to operate for decades. A parent may know that trust property should eventually remain among descendants but may not know today which child or grandchild will need more protection, whether a beneficiary will develop creditor or marital problems, or whether an outright distribution will still make sense years from now.
For clients using trusts as part of their New York estate planning, powers of appointment can provide that flexibility. They can also create unintended consequences when the power is drafted too broadly, when a later will inadvertently exercises it, or when the beneficiary preparing a new estate plan does not realize that the power exists.
What Is a Power of Appointment?
EPTL § 10-3.1 defines a power of appointment as authority created or reserved by a person with property subject to disposition that enables another person to designate who will receive the property, the shares those persons will receive, or the manner in which the property will be received.
The terminology is useful. The person creating the power is generally called the donor. The person who receives the authority is the donee. The persons who may receive the property through exercise of the power are the permissible appointees.
The donee does not necessarily own the property. Instead, the donee has authority over its ultimate disposition within the limits established by the donor.
Consider a trust for a daughter that gives her the income during life and provides that the remaining principal passes to her descendants at death. The trust might also give the daughter authority to appoint that remainder among her descendants in whatever proportions she chooses.
Years later, one child may be financially secure, another may have a disability, and another may be going through a divorce. A carefully drafted power permits the daughter to respond to circumstances that could not reasonably have been predicted when the trust was created.
General and Special Powers Are Very Different
EPTL § 10-3.2 classifies powers as general or special.
A general power is exercisable wholly in favor of the donee, the donee’s estate, the donee’s creditors, or creditors of the donee’s estate. All other powers are special powers. The statute further distinguishes between exclusive and non-exclusive special powers. An exclusive power can favor some permissible appointees while excluding others; a non-exclusive power requires exercise in favor of all permissible appointees.
That distinction matters because a general power can give the holder something close to ownership-level control over the appointed property. Depending on the circumstances, it can also have tax and creditor consequences that should be considered when the document is drafted.
A special power is often used when the trust creator wants flexibility without giving the beneficiary unrestricted authority. A trust might permit appointment among descendants, among descendants and charities, or among a specifically defined family group.
The permissible class should be drafted with care. Giving a beneficiary authority to appoint among descendants is materially different from permitting appointment to any person other than the beneficiary, the beneficiary’s estate, or creditors.
When Can the Power Be Exercised?
EPTL § 10-3.3 classifies powers by the time when they may be exercised.
A presently exercisable power may generally be exercised during the donee’s lifetime or by written will. A testamentary power is exercisable only by the donee’s written will. A postponed power becomes exercisable only after a specified time or event.
This can be particularly important when a beneficiary is updating an estate plan.
A person holding a testamentary power may have no ability to exercise it through a lifetime trust amendment, beneficiary designation, or informal direction to the trustee. The written will becomes the operative document.
Conversely, a presently exercisable power may offer planning opportunities during life. Before any exercise is prepared, counsel should determine exactly what type of power exists and whether any conditions to its exercise have been satisfied.
A Will Can Sometimes Exercise a Power Without Naming It
One of the more consequential New York rules appears in EPTL § 10-6.1.
An effective exercise does not always require an express reference to the power. A donee can manifest an intention to exercise the power in several ways, including by sufficiently identifying the appointed property or, in some circumstances, by leaving a will disposing of all property or all property of the type covered by the power.
That means a broadly drafted residuary clause can potentially affect more than the property titled in the testator’s individual name.
Suppose a beneficiary owns substantial personal assets and also holds a testamentary power over a family trust. A will leaving all the rest of my property to the beneficiary’s spouse should not be analyzed solely by examining individually owned assets. The trust creating the power also has to be reviewed.
Specific-reference requirements
EPTL § 10-6.1(b) provides an important exception. If the donor expressly requires that any exercise specifically refer to the power, an instrument that does not contain the required reference will not validly exercise the power.
That requirement can prevent accidental exercise. It can also cause an intended appointment to fail if the beneficiary’s later will was prepared without reviewing the original trust.
For that reason, a client updating a will should provide copies of trusts under which the client is a beneficiary rather than assume those documents are unrelated to the client’s own estate plan.
The Donor’s Conditions Still Control
A power of appointment is not unlimited authority.
EPTL § 10-6.2 generally requires compliance with the donor’s directions concerning the manner, time, and conditions of exercise, subject to the specific statutory qualifications in that section.
The document creating the power should therefore be reviewed for several points:
- who holds the power;
- whether it is general or special;
- who may receive property;
- whether the power is exclusive or non-exclusive;
- whether it is presently exercisable or testamentary;
- whether a particular instrument must be used;
- whether a specific reference is required; and
- whether another person’s consent is necessary.
Working backward from the beneficiary’s desired disposition without first identifying the source and scope of authority can produce an ineffective appointment.
An Exercise That Goes Too Far May Not Fail Entirely
EPTL § 10-6.6 provides that an exercise that is more extensive than authorized is not necessarily wholly void. It may remain valid to the extent authorized. Likewise, an exercise that is less extensive than authorized is generally valid unless the donor manifested a contrary intention.
That rule can matter where a donee attempts to appoint to both permissible and impermissible recipients.
The issue should not be treated casually. A partial failure can create complicated construction questions, particularly when the will does not clearly separate appointments or when the default takers under the original trust differ substantially from the intended appointees.
A better approach is to draft the exercise only after the governing instrument has been reviewed carefully.
Powers Can Sometimes Be Released
A person who holds a power may not always want to retain it.
EPTL § 10-9.2 generally permits release of a power of appointment, other than an imperative power, through a signed written instrument delivered in the manner provided by the statute. A release can apply to the entire power, only part of the appointed property, or can narrow the permissible appointees.
A release can have substantial tax, creditor, and dispositive consequences and should not be treated as a routine housekeeping document.
The relevant question is why the power exists and whether retaining, exercising, narrowing, or releasing it still serves the planning objective.
Coordinating the Power With the Beneficiary’s Own Estate Plan
A client’s own will may be only one layer of a multigenerational plan.
Parents and grandparents frequently create trusts that continue for the benefit of children and grandchildren. When a beneficiary later prepares a will, the beneficiary may be controlling two separate pools of property: individually owned assets and appointed trust property.
That can create unexpected results during probate and estate administration. An executor may discover that the decedent’s will exercises a power over a trust that is being administered separately by another trustee.
Good drafting should make that relationship clear. If the beneficiary intends to exercise the power, the language should identify the power with sufficient precision and comply with any requirements imposed by the donor. If the beneficiary intends not to exercise it, the will should be reviewed to determine whether broad dispositive language could nevertheless operate as an exercise under EPTL § 10-6.1.
When to Speak With a New York Estate Planning Attorney
Powers of appointment are easy to overlook because the property often does not appear on the client’s balance sheet. The client may hold only an interest in a trust created by someone else, yet the power can materially change the eventual distribution of that property.
A review is particularly important when a client receives a trust from a parent or grandparent, revises a will, changes the shares passing among descendants, has a beneficiary with creditor or marital concerns, or holds a power created many years earlier.
For families in Hampton Bays, the East End, Suffolk County, and elsewhere on Long Island, information about William G. Goode is available on the attorney profile, and the firm can be reached through its contact page.
References
- EPTL § 10-3.1 defines powers of appointment.
- EPTL § 10-3.2 classifies general, special, exclusive, and non-exclusive powers.
- EPTL § 10-3.3 classifies powers by time of exercise.
- EPTL § 10-6.1 governs manifestation of intent to exercise a power.
- EPTL § 10-6.2 addresses conformity with the donor’s directions.
- EPTL § 10-9.2 governs releases.
Short FAQ
Can my will exercise a power of appointment even if it does not mention the trust?
Potentially. EPTL § 10-6.1 recognizes circumstances in which broad dispositive language can manifest an intent to exercise a power, unless the donor required a specific reference.
What is the difference between a general and special power?
A general power is broadly exercisable in favor of the holder, the holder’s estate, or specified creditors. A special power is more limited and commonly restricts appointments to a defined class.
Can I exercise a testamentary power during my lifetime?
Generally no. EPTL § 10-3.3 defines a testamentary power as one exercisable only through the donee’s written will.
Can a power of appointment be released?
Many powers can be released under EPTL § 10-9.2, subject to the statute’s requirements. The consequences should be reviewed before doing so.
Should my estate planning attorney review trusts created for me by other people?
Yes. Those trusts may contain appointment powers that interact directly with your will and can affect substantial property that you do not own outright.
Disclaimer
This article is for general informational purposes only and is not legal advice. Reading this article does not create an attorney-client relationship. Estate and Surrogate’s Court matters are fact-specific, and individuals should consult with an attorney regarding their particular circumstances. Prior results do not guarantee a similar outcome. This may be considered attorney advertising.
